The role of corporate governance in the relationships of family company with real earnings management

Indah Masri

doi:10.24912/ja.v22i1.322

Abstract

The purpose of this research was to determine the effect of family ownership on real earnings management with corporate governance as a moderation variable in this relationship. This research is also looking at the role of accrual earnings management as a substitute in the relationship accrual earnings management with real earnings management in a family company. This study uses data 61 manufacturing companies on the Indonesia Stock Exchange in the period 2010 to 2013. The research results according to which hypothesized that family firms tend to negatively affect with real earnings management. The role of corporate governance as strengthening internal oversight negative effect on family companies with real earnings management. The results also proved the existence of a relationship of substitution for family firms tend to be doing accrual earnings management than real earnings management. This is because on the one hand the motivation of control as a strong incentive to do accrual earnings management in the family company, while on the other hand, the family companies tend to dislike real earnings management for their negative performance impact.

Highlights

Almost every major public companies in Asia, especially in Indonesia are owned by families
While to test hypothesis 5 that proved significant positive at level 1% is legal expert audit committee, that is a family company with big portion of legal expert audit committee which should act as an internal supervisor so it is increasingly looking for a gap to be able to do earnings management in real.The results of this study indicate in non-family companies, Corporate Governance variables on legal expert committee audit will negatively affect real earnings management
This study examines the effect of family ownership on Real Earnings Management with Corporate Governance variables on internal control as a moderating variable in the relationship

Summary

Introduction

Almost every major public companies in Asia, especially in Indonesia are owned by families. Achleitner et al (2014) in his research hypothesized that companies owned by families more accrual earning management and less make real earning management than non-family companies. This is because on one hand the motivation of control as a strong. This study attempts to add Achleitner's et al(2014) research by looking at the effect of family ownership with real earnings management (Roychowdhury, 2006) where its proxy is the sum of Ab_CFO, Ab_Prod, and Ab_DisExp. In addition, this study adds the role of Corporate Governance which is internal control in this relationship. This research can give some contribution that is: 1) Real Earnings Management (REM) proxy used in this research is different from Achleitner’s et al (2014) research that is by summing the three proxies of real earnings management proposed by Roychowdhury (2006). 2) Adding the role of corporate governance in relation to family ownership and real earnings management, especially for internal control. 3) Adding the Accrual Earnings Management (AEM) variable in the research model to prove a substitution relationship that the family firms that do accrual earnings management tend not to do real earnings management

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Conclusion